CLASS ACTION SUIT

Class Action Suit became reality for Indian investor(s)/depositor(s) under new Companies Act, 2013 which is also known as Representative Suit. This kind of lawsuit is very popular in countries like USA, UK, Singapore, Canada, Austria and other European Countries. Class Action Suit gained momentum with the case of Satyam, where the financials of the Company were manipulated for number of years and the Indian investors drown their hard earn money in the market due to fraud my company’s promoter. The noteworthy point was that the American depositors of Satyam was able to receive $125 million (about Rs. 700 Crore) in settlement because of strong framework of class action in USA.

1. WHICH ARE THE COMPANIES AGAINST WHICH CLASS ACTION SUITS UNDER SECTION 245 CAN BE FILED?
   

   Ans: Class Action Suit can be filed against any companies except banking companies. The Companies Act, 2013 empowers the Central Government to exempt any company or class of company from this provision.

2. WHO CAN FILE CLASS ACTION SUITS

   Ans: As per Section 245 (1) read with 245 (3) suit may be filed by

   • • Members of the Company Criteria for Company Having Share Capital
       1. not less than 100 members of the company OR
       2. not less than 10% of the total number of its members,

          whichever is less can file class action suit, however, any member or members singly or jointly holding not less than 10% of the issued share capital of the company can file class action suit

       Provided that the applicants have paid all calls and other sums due on their shares

       Company not having Share Capital

       1. Not less than 1/5th of the total number of its members
     • Depositors of the Company

       The number of depositors shall not be less than 100

       OR

       Not less than 10% of the total number of its depositors, whichever is less can file class action suit

   However, any depositor or depositors singly or jointly holding not less than 10% of the total value of outstanding deposits of the company can file class action suit.

3. WHO MAY BE SUED THROUGH CLASS ACTION SUITS?

   Ans: A class action suit may be filed against the following persons

   • A company or its directors for any fraudulent, unlawful or wrongful act or omission
   • An auditor including audit firm of a company for any improper or misleading statement of particulars made in the audit report or for any unlawful or fraudulent conduct.
   • An expert or advisor or consultant for an incorrect or misleading statement made to the company
4. WHICH RELIEFS MAY BE CLAIMED THROUGH CLASS ACTION SUITS?

   Ans: Any member or depositor on behalf of such members or depositors may file a class action suit before the National Company Law Tribunal (NCLT) to:

   1. seeking injunctive orders, restraining the company from omitting acts which either violate or which are ultra vires of its charter documents, or any law or action which may be contrary to adopted resolutions.
   2. declaration that resolutions are void when they are rooted in misrepresentation or suppression of material facts.
   3. claiming damages or other appropriate action from directors, auditors, external advisors or any other person who made incorrect statements or who engaged in the suppression of material facts or fraudulent conduct.
   4. To seek any other remedy as tribunal may deem fit.
5. WHAT ACTION WILL BE TAKEN BY NCLT ON A CLASS ACTION SUIT APPLICATION?

   Ans: The Tribunal after taking into account the following points as mentioned in Section 245(4) and Rule 85 of NCLT Rules, 2016, may admit or dismiss the application

   Step 1: The Tribunal will look into the following before admitting it

   • whether the member or depositor is acting in good faith
   • check if there is evidence of involvement of third parties i.e. other than directors or officers (includes manager, KMPs, etc.) of the company
   • whether the class action suit is a better option than individual suits
   • whether there are questions of law common to the class
   • whether the representative parties will protect the interest of the class —

   Step 2. Once an application is admitted, the Tribunal will direct following actions, namely:

   • Issue Public notice shall be served on admission of the application to all the members or depositors of the class in such manner as may be prescribed
   • The said notice also should be published within seven days of admission of the Application by the Tribunal in a vernacular newspaper in the principal vernacular language of the State in which the registered office of the company is situated and at least once in English in an English newspaper that is in circulation in that State.
   • Notice shall also be placed on the websites of the Tribunal and the Ministry of Corporate Affairs, the concerned Registrar of Companies and in respect of a listed company on the website of the concerned stock exchange where the company has any of its securities listed until the application is disposed of by the Tribunal
   • All similar applications prevalent in any jurisdiction should be consolidated into a single application and the class members or depositors should be allowed to choose the lead applicant and in the event the members or depositors of the class are unable to come to a consensus, the Tribunal shall have the power to appoint a lead applicant, who shall be in charge of the proceedings from the applicant’s side

   Step 3. A copy of every application made under this section shall be served on the Regional Director and Registrar of Companies.

   Step 4. Any order passed by the Tribunal shall be binding on the company and all its members, depositors and auditor including audit firm or expert or consultant or advisor or any other person associated with the company

   There can not be two class action applications for the same cause of action

6. IF APPLICATION MADE BY MEMBER OR DEPOSITORS IS FOUND FRIVOLOUS?

   Ans: Where any application filed before the Tribunal is found to be frivolous or vexatious, it shall, for reasons to be recorded in writing, reject the application and make an order that the applicant shall pay to the opposite party such cost, not exceeding Rs. 1 Lakh, as may be specified in the order

7. WHO WILL BEAR THE EXPENSES OF APPLICATION MADE UNDER SECTION 245 OF COMPANIES ACT, 2013?

   Ans: The cost or expenses connected with the publication of the public notice shall be borne by the applicant and shall be defrayed by the company or any other person responsible for any oppressive act

8. WHAT WILL BE THE PENALTY FOR NON-COMPLIANCE OF ORDER PASSED BY TRIBUNAL?

   Ans: Any company which fails to comply with an order passed by the Tribunal under Section 245 shall be punishable with fine which shall not be less than Rs. 5 Lakhs but which may extend to Rs. 25 Lakhs and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 3 years and with fine which shall not be less than Rs. 25,000/- but which may extend to Rs. 1,00,000/-.

Conclusion

It may be concluded that class action suits will be a beneficial platform for members and depositors to raise their grievances against the management of a company including directors, advisors, consultants, auditors etc for acts or omission that is prejudicial, unlawful or wrongful to the interest of the company. Class action suits may be undertaken as a redressal tool by minority shareholders having common interest for promotion of transparent corporate governance.